If you're considering buying a vacation home that will also earn income from short-term rentals, you'll have to think about more than your own desires. The best location for you isn’t necessarily the one that will best attract short-term renters.
For example, if the home well off the beaten track, no one may have even heard of the place, much less think to search for a vacation rental there.
Here’s what else to consider in choosing your likely location:
- Local vacation rental rates. Get a copy of the local newspaper and look at the available vacation rentals comparable to the size and type of house that you’re interested in. This will help you gauge what your competitors are charging and whether you’ll likely be able to charge enough to cover your costs. Keep in mind that many vacation rentals have varying rates depending on the time of year. It’s best to look at rental rates during the high and low season and create an average. Have your agent find out when the rental rates change and what these rates are. You can also ask other landlords in the area. Also, realize that all houses in a given area aren’t created equal: For example, a house that’s walkable to the beach will rent for more than an equivalent one that’s a two-minute drive away. Of course, that house will also cost you more to buy.
- Which way rental rates are headed. Your snapshot view won’t tell you whether you can raise your asking rent next year — or might have to lower it. Find out the average amount by which local vacation rents have increased or decreased over the last five or so years. (You’ll need to know this when you calculate your cash flow.) Your best bet is to contact a local property management company or ask a real estate agent who also handles property management in the area. You can also call the local newspaper and request back issues from previous years so you can search through the classifieds. And keep your eye on the local and national news, too. Rents on vacation properties can shift up or down considerably based on the state of the national and local economy. When the economy is down, vacations are among the first nonnecessities that people cut.
- Vacancy rates. Usually expressed as a percentage, this tells you how many months out of the season you can expect to have your place sit empty (for example, because the beach is too windy to stroll on in winter, or the ski season lasts only a few months). A strong vacation rental market would have a vacancy rate of 10% or lower during the peak season. Ask your real estate agent for the median vacancy rates during the peak and off-peak seasons.
- Surrounding activities. Aside from the main attraction drawing prospective renters — a lake, mountain, golf course, or whatever — it helps if your location supports auxiliary activities such as dining out; visiting art galleries or antique shops; renting DVD s; shopping for food, forgotten toothbrushes, and souvenirs; and so on. Make sure these are within a reasonable driving distance (usually 20 minutes or less).
- Crime rate. High crime will deter vacation renters. Criminal activity also adds to your headaches as a landlord, since you’ll have to think about security measures, what to warn your tenants about, and so forth.
If you're considering a vacation rental in an area you've already stayed in, you know about some of the above considerations. If not, you'll want to do some in-depth research, and try taking a few trips to the area as a renter before you commit to buying.